Question

Case #2

In 2017, Olivia started Sandwich Booth as a producer of fresh sandwiches sold in grocery stores throughout the Avalon Peninsula. While she produces a variety of sandwiches, her roast chicken with grilled peppers and goat cheese continues to be her most popular product line. Each sandwich sells for $10.00 and, by 2018, Olivia’s sandwiches were so popular that she could no longer keep up with demand. That year, Olivia hired two friends, Aria and Nico, to help with food production and allow her to focus her efforts on marketing and distribution.

To help Olivia understand the cost of operating her business, she implemented a standard costing system. Standard costs are updated monthly and the standard cost sheet used for July production (previous month) of the chicken sandwich product line is as follows:

	Standard Price/Kg	Standard Usage/Sandwich
Roast chicken	$3.50	0.55 kg
Grilled peppers	$8.70	0.24 kg
Goat cheese	$42.20	0.05 kg
* Direct labour	$14.80 per hour	0.10 hrs
** Variable overhead	$2.00	0.02 hrs
** Fixed overhead	$0.40	0.05 hrs

* This rate is per hour (not per kilogram).

                        ** Based on direct labour hours.

Olivia also gathered actual production activity for the roast chicken sandwiches for the month of July:

Actual production of roast chicken sandwiches	3,335
Roast chicken	$4.52
Grilled pepper were purchased at (per kg)	$8.64
Goat cheese was purchased at (per kg)	$43.12
Direct labour:
Direct labour total cost	$4,487
Direct labour hours used	300

Olivia estimates practical activity to be 3,250 chicken sandwiches per month. Ingredients are purchased throughout each month. Inventory data regarding raw materials for July is provided below.

Raw Material	Beginning Inventory	Ending Inventory	Inventory Used
Roast chicken	260 kg	310 kg	1,868 kg
Grilled peppers	385 kg	180 kg	767 kg
Goat cheese	15 kg	87 kg	200 kg

Generally speaking, Olivia is pleased with the performance of Aria and Nico. They have both been enthusiastic and pleasant employees to have working for the company. Recently, Nico provided Olivia with a sample of a roast chicken sandwich made with his grandmother’s traditional family recipe. Although Olivia found it too salty for her tastes, she agreed to have Nico prepare sandwiches using the family recipe. In July, Olivia thought she noticed the roast sandwiches prepared using Nico’s family recipe were the first to sell out and, overall, was pleasantly surprised to find that roast chicken sandwich sales were more than 400 units higher than in June.

Required:

1. Olivia’s goal is to maintain a minimum net profit of 10% on the roast chicken sandwiches. Determine whether the current standard cost of the chicken sandwiches will generate the required net profit.

2. Calculate the raw material price and usage variance, the direct labour rate and efficiencies variances, and indicate whether each variance is favourable or unfavourable. Please note that there are three raw material inputs (i.e., roast chicken, grilled peppers, and goat cheese). Thus, you will need to compute three material price variances and three materials usage variances.

3. Olivia has set a control limit of plus or minus $75 on each of the raw material inputs and $100 for direct labour, for both the individual price (rate) and usage (efficiency) variances. Based on the material and labour variances you computed, which variances should be investigated?

4. Based on your variance analysis above, could the variances have any connection to Nico, one of the two new hires? If so, should Nico’s employment be terminated?

Answer 1

#)

Estimates practical activity = 3250 chicken sandwiches per month

Estimated standard cost;

Rost chicken (3250 * .55 kg) * $ 3.5 / kg = $ 6256.25

Grilled peppers ( 3250 * .24kg) * $ 8.7/kg = $ 6786

Goat cheese    ( 3250 * .05kg) * $ 42.2 = $ 6857.5

Direct labour    ( 3250 * .10 hour ) *$ 14.8= $ 4810

Variable overhead ( 3250 * .02 hour) * 2 = $ 130

Fixed overhead ( 3250 * .05 hr) * .4 = $ 65

Total cost = $ 24904.75

selling price= $ 10 , Toatl sales = 3250 * $ 10 = $ 32500

Net profit = 32500 - 24904.75 = 7595.25 , net profit percentage = (7595.25/ 32500 ) * 100 = 23.37 %

Required net profit of olivia is 10%. So the current standard cost of the chicken sandwiches will generate the required net profit.

# )

Actual quantity of Inventory used ;

Roast chicken = 1868 kg

Grilled peppers = 767 kg

Goat cheese = 200 kg

Stanadrd quantity of raw material for actual production;

Actual production = 3335 sandwiches

Roast chicken = 3335 * .55 kg = 1834.25 kg

Grilled peppers = 3335 * .24 kg = 800.4 kg

Goat cheese = 3335 * .05 kg = 166.75 kg

Actual price ;

Roast chicken = $ 4.52

Grilled peppers = $ 8.64

Goat cheese = $43.12

Standard price;

Roast chicken =  $3.50

Grilled peppers =  $8.70

Goat cheese = $42.20

Material price variance = ( Actual price - Standard price ) * Actual quantity

Material price variance ;

Roast chicken = ( 4.52 - 3.5) * 1868 = 1905.36 Unfavorable

Grilled peppers = ( 8.64 - 8.70) * 767 = 46.02 favorable

Goat cheese = ( 43.12 - 42.20) * 200 = 184 unfavorable

Total Material price variance = 1905.36 Unfavorable +46.02 favorable + 184 unfavorable = 2043.34 unfavorable

Material uasage variance = ( Actual quantity - standard quantity ) * Standard price

Material usage variance;

Roast chicken = ( 1868 - 1834.25 ) * 3.50 =118.125 Unfavorable

Grilled peppers = ( 767 - 800.4 ) * 8.70 = 290.58 favorable

Goat cheese = ( 200 - 166.75 ) * 42.20 = 1403.15 Unfavorable

Total Material uage variance = 118.125 Unfavorable + 290.58 favorable + 1403.15 Unfavorable

= 1230.695 unfavorable

Actual labor hours used = 300 hours

Actual labor rate = Total labor cost / labor hours = 4487/300 = $ 14.96 per hour

Standard hours for actual production = 3335 * .10 hr/ sandwich = 333.5 hours

Standard rate = $ 14.80 per labor hour

Labor efficiency variance = ( actual hours - standard hours ) * Standard rate

= ( 300 - 333.5 ) * 14.80 = 495.8 favorable

Labor rate variance = ( Actaual rate - Standard rate ) * Actual hours

= ( 14.96 - 14.80 ) * 300 = 48 Unfavorable

# )

Material price variance;

Roast chicken = 1905.36 Unfavorable

Goat cheese = 184 unfavorable

Material usage variances;

Roast chicken = ( 1868 - 1834.25 ) * 3.50 =118.125 Unfavorable

Grilled peppers = ( 767 - 800.4 ) * 8.70 = 290.58 favorable

Goat cheese = ( 200 - 166.75 ) * 42.20 = 1403.15 Unfavorable

Each of these price and usage variances are exceeding 75 so these should be investigated.

Labor efficiency variance = 495.8 favorable . It is exceeding 100, so this also should investigated.

# )

Nico's family reciepe were the first to sell out sandwich. Roast chicken sandwich sales are 400 units are higher than the previous months sale. This increased production may be reason for material usage variance. And new recipe may require more raw materials than bugeted.

Material price variance may be due to high quality of raw materials used  and these quality raw material may cause labor efficiency variance. Or these may be due to price increases in the market and standards not upadated.

The standards of the sandwich is not updated according to the new recipe. So the material price and labor efficiency variance may created due to quality raw material used in the production.

But this should not be a reason for terminate Nico. There is no fradulent activity or inefficiencies or fault in the part of recipe introduced by Nico. So he shouldn't be terminated . His recipe is the first to sell out product in the sandwich. And total sales also has increased. So it may be the problem of unupdated standards according to the new recipe. So update the standards and evaluate Nico.